What If? An Equity Market Correction Like 2001

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In a recent Economist article, Gita Gopinath considered the implications of a AI bust similar in magnitude to the 2001 dotcom bust for the global economy.

I thought I would consider a more narrow question of a what happens to US household wealth. Consider household equity and mutual fund wealth as a component of net worth.

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Figure 1: Household net worth ex-equity+mutual funds (teal bar), household holdings of equity+mutual funds, mn. 2017$. Deflated by PCE deflator. NBER defined peak-to-trough recession dates shaded gray. Source: Federal Reserve Flow of Funds, and BEA via FRED, NBER, author’s calculations.

Mid-2025 household wealth in equities and mutual funds is approximately $51 trillion. A 26% drop in capitalization — as took place 2000Q4-2001Q4 — would reduce that by $13.3 trillion (all ballpark figures).(Gopinath’s calculation was likely based on total capitalization, including stocks held by rest-of-the-world).

If the sensitivity of consumption to wealth is 5 cents on the dollar, then that translates to a reduction of some Ch.17$ 526 billion, or about 3% of mid-2025 consumption, distributed over several years. Using a sensitivity of 3 cents on the dollar (might be more appropriate for equity wealth), then a reduction of about 1.9% is implied.

For reference, here are the forward P/E ratios for the Magnificent 7 and the S&P500, including and excluding the Magnificent 7: